Debt Interest Risks Crowding Out Government Spending on Other Priorities

Debt Interest Risks Crowding Out Government Spending on Other Priorities 

Sean Speer, Charles Lammam, and Milagros Palacios NEW RESEARCH FRASER INSTITUTE fraserinstitute.org FRASER RESEARCH BULLETIN 1 Sean Speer, Charles Lammam, Milagros Palacios, Hugh MacIntyre, and Feixue Ren FRASER RESEARCH BULLETIN August 2014


 A major theme of this year’s federal and various provincial budgets is continuing deficit spending and growing government debt. The result of recent deficits and debt accumulation is that the combined federal and provincial net debt has increased from $823 billion in 2007/08 to over $1.2 trillion (or $34,905 for every man, woman, and child living in Canada) in 2013/14.

This type of debt accumulation has costs.

One major consequence is that governments must make interest payments on their debt similar to households who pay interest on borrowing related to mortgages, vehicles, or credit card spending. Spending on interest payments consumes government revenues and leaves less money available for other important priorities such as spending on health care and education or tax relief. Canadian governments (including local governments) collectively spent an estimated $61.7 billion on interest payments in 2013/14.

  To put that in perspective, it is more than Canada’s public spending on primary and secondary education ($61.0 billion, as of 2011/12, the last year for which we have finalized data), or more than the three major federal-to-provincial government transfer programs comprising Equalization, the Canada Health Transfer and Canada Social Transfer ($58.6 billion).


 Summary
 FROM THE CENTRE FOR FISCAL STUDIES

The Cost of Government Debt in Canada Interest payments on government debt Your tax dollarsWinter 2014 | 11 cents of every tax dollar they collect simply to service past debt obligations.

 These interest payments leave fewer resources available for important priorities such as tax relief and spending on public programs such as health care, education, and social services.

 Consider the following examples from Canada’s two largest governments whose interest payments are now comparable to key revenue sources and spending programs. In 2013/14, interest payments on the federal debt totalled $29.3 billion, which roughly equals the $29.9 billion collected in GST revenue and the $32.3 billion spent on Old Age Security benefits for Canadian seniors. In the same year, the Ontario government spent $10.6 billion on interest payments—more than the entire $10.1 billion budget for the ministry of community and social services and close to the $10.8 billion the government spent on infrastructure (roads, hospitals, schools, etc.).

Collectively the story is equally sobering. Canadian governments (including local governments) cumulatively spent $61.7 billion on interest payments in 2013/14, outpacing all public spending on K-12 education ($61.0 billion as of 2011/12, the last year for which we have data) and the three major federal-to-provincial government transfer programs ($58.6 billion).

 Interest payments clearly aren’t trivial when compared to other major revenue and spending items. If governments dig deeper into debt, interest payments could grow and eat up more government resources, displacing spending on things that Canadians care about and adding to the burden of repayment on future generations.

 Although debt levels are important, higher interest rates (or the costs of borrowing) pose a real threat to indebted governments. Governments have been borrowing at historically low interest rates; if rates rise, the cost of carrying debt will increase. Governments that maintain relatively high and growing debt levels, such as Ontario and Quebec, are especially vulnerable to interest rate hikes.

Bottom line: deficit spending and growing government debt is not without costs. Rising government debt can result in more resources going to interest payments and not public priorities that benefit Canadian families or improve the country’s economic competitiveness.

 Some may try to justify deficits and debt in certain circumstances, but they can’t ignore the immediate and future consequences. Five years after the recession, now is a good time to reverse the trend and rein in government debt.

The Cost of Government Debt in Canada 11%  of your tax dollars . . . . . . is $62 billion burned on interest payments .



SEAN SPEER CHARLES LAMMAM MILAGROS PALACIOS Sean Speer is Associate Director of Government Budgets and Fiscal Policy, Charles Lammam is Associate Director of Tax and Fiscal Policy, and Milagros Palacios is a Senior Research Economist in the Fiscal Studies Department at the Fraser Institute. They are co-authors of The Cost of Government Debt in Canada, which is available at www.fraserinstitute.org.